frsbog_mim_v03_1270.pdf

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RELEASED FOR THE EVENING PAPERS OF FRIDAY, JUNE $.

Address of Hon. Paul Mi WaTburg before the Convention of the New Yof*k State Bankers! Assn.,Atlantic City, IT* j., June 9, 1916.

The federal, reserve system and the banks-

A-^ucc^ssful solution of Federal Reserve

problems is dependent equally upon a thorough, under-:

standing of the many features of detail involved in

the technique of banking end upon a strong gra:Jp of

the big and fundamental objects for the accomplishment

of which the system was created.

It is, therefore, a pleasure to address an

audience that is certain tc have a keen and sympathetic

interest in both of these phases of the problbmi

I an. particularly anxious, however, to speak

to you.about ths broader and more fundamental questions

involved, for there is an indefinite feeling of appre

hension in my mind that at thi3 time we may be losing

the big point of view of financial statesmanship, and

that petty and technical questions may be claiming per

haps, too much of our consideration.

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Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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Miile in South .America, I had ah oppor

tunity to get a bird13 dye-view of the operation

of the Federal Reserve System* With the keenesi\ i

.enjoyment and pride I daw our system hitting its

mark many thousands of miles away, and became deep

ly impressed that we are* now firmly establishing

ourselves as a great financial power in the world1 s

.market* Upon my return^ I felt a very chilling

change of atmosphere, vdicn I eb t .American bankers

appearing to hold the view that the future of our

great monetary and banking system depends upon

the question -whether or not * a country bank

might charge exchange of one-tenth of one per

cent when remitting for checks drawn on itself l

. The banking system of a world power can

net possibly be c021straced upon so small a founda

tion.’

I still remember that, when I had my first

training in banking in Hamburg, thirty years ago


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my dear old father*j mind strongly rebelled agdihst

what he considered then the new-fashioned idea of

oemg repaired *• not by the government, indeed*

out by the general law of competition -» to discon

tinue the practice of charging a small commission

when remitting for checks or maturing bills drawn

on his banking firm* But he socn perceived that

the eotablisbment of a general transfer and clear

ing oy*tem, postal orders and postal checks^had

made for new condition and that the development

of a discount system based upon modern pnncipleo

of banking, \hile breaking down certain petxy

revenues, was bringing about a tremendous increase

m the volume of buoiness. As a result, he soon

waived his objection*) and lent his hand in turning

his country from provincialism into an international

banking power. That, as I oaid, was thirty years

ago.


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1 have Ac doubt that this country has de

cided that it is entitled tc ac modern a banking

system as the rest of xhe wofla, and that whatever

old-fashioned privilege still blocks the fcath will •

have to fall by the wayside- Tty0 sacrifice will

have to be borne for the general good and will

find its compensation in the freer economic de

velopment of the country.

One of the most tangible results of the

operation of the Federal Reserve System is tns

establishment and growth of the American bank

ers* acceptance business. In addressing a

group of bankers, it is unnecessary to dwell

at length upon the fundamental importance of

this development for the general safety of our

banking system. We have now a substantial

market for bankers* acceptances to which all

member banks will look for the.investment of

same of their idle means and in which, at any

\


time* they itiay reconvert these holdings into

liquid funds*

The more important this market grows,

the stronger will be the position of the Federal

Reserve Banks, for the greater or lesser volume

of purchases of such acceptances will offer one

of the Federal Reserve Banks' most effective

means of exercising a wholesome influence upon

the fluctuation of interest rates. A3 normal

conditions are reestablished in the world, this

acceptance market will become an important fac

tor in protecting our exchange position with

foreign countries and, incidentally, our gold

holdings. It has taken some'time to develop

this market, but I am confident that, from now

cn,its growth will be rapid. One of the ob

stacles that made-the start difficult was found

in the fact that many acceptances, uhich are

made for the purpose of financing importations .


and exportations, have to he drawn and sold in

foreign countries. . In order to make them nego

tiable in those countries as a popular and cur-

rent means of exchange, it wa3 first necessary

to find hanks there,which would he willing to

purchase them ’f reely whenever offered. It i3

unnecessary to say that European hanks operating

in these- foreign fields were not over-anxious to

see American hankers enter a business which they

themselves monopolized up to the beginning of

this war. It is only since our own hanks

went out into foreign lands and established

their own branches that the necessary foreign

market for American acceptances has been de

veloped. The establishment of foreign branches

of American tanks has been a most important step

in advance, and without it bur acceptance system

could not have progressed as far as it has to

day. The advent of these American branches

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forc'ed the other banks to modify their resist

ance and to compete for our bills wnich, up to

that time, they had tried tc disregard. It is

to be hoped that other American banks vail soon

follow in establishing themselves in foreign

countries. As you knew, the Federal Reserve

Board has recommended an amendment to the Act

to enable national banks, singly or jointly, to

hold stock in banka organized "princi

pally to do business in foreign countries. "

Ohe U 11 has already passed the House, and .

another has been reported favorably by the Sen

ate committee on banking and currency. The Board

hopes that a satisfactory bill will be agreed

upon by both houses in the very near future.

It is a strange fact,however, that many

of our business men, who enjoy the reputation

of being keen and progressive, are actually

wasting their funds by still using foreign ac-

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ceptance credits instead of- American. At Rio,

I found tc my surprise that the majority of

American coffee importers were still using let

ters of credit in sterling for which they were

paying a discount rats of about. as against

the American discount rate of 2f>. Moreover, in

doing so, they were often paying two commissions,

one tc the foreign hanker- who issuesjand one to

the American hanker who opens the credit, in

stead of paying a single'commission to the Amer

ican hanker.

It is true that the wool and hide busi

ness, done by New England with the Argentine, is

today .financed by dollar acceptances drawn on Bos.

ton and New York, and that the oriental trade has

begun to use dollar bills, but it is surprising

that so large a number of New York importers

are still clinging to their old pound sterling

acceptance arrangements.


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Let me venture to urge most earnestly that

our bankers canvass xheir lists of importing and ex

porting firms and point out to them tne folly of not

using American banking facilities. Since my re

turn I have tried to see personally some of these

large importing firms and explain to them tho anomaly

of their action. I believe,, however, than an asso

ciation like yours is particularly wall adapted for

carrying on a campaign of education of this kind,

With our increasing financial strength and

with the daily diminution of Europe's saving power,

it stands to reason that, for a long time to come,

our discount rates will compare favorably with those

of Europe. We may expect, therefore, that this

acceptance business will not only hold its own, but

will grow and may be used to a substantial extent

even by European importers and exporters, and thus

relieve Europe of some of her financial burdens.


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While our foreign competitors, with few noteworthy exceptions, are still trying to keep cur dollar acceptances in obscurity, our machinery is now firmly organized• There are now local banks almost everywhere abroad willing to buy American drafts going forward for acceptance and to deal in dollar exchange on practically the same narrow margin which prevails in dealings in sterling, marksJor francs, and the Federal Reserve Banks are willing, whenever desired, to do their share by quoting favorable "forward discount rates" to assure the rate of discount pending the time of transit. This new feature of American banking, which is to be one of the roots of our strength and, at the same time, a new source of profitable and sound banking, ought to be developed energetically by both our bankers and cur business men.


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In this connection, it may not he amiss to give you a short account of the conference of the International High Commission at Buenos Aires.

In our del iterations, the question of "banking was given particular attention, and I am happy to report that the general tendency at the conference was to do everything possible to foster trade relations between the United States and her neighbors to the South, and mutually to open the doors ’.vide to one another's banks. Resolu- i ons w0 2T8 p sij sed making for the adoption by Central and South America of uniform laws concerning bills- of exchange, bills of lading, warehouse receipts, and similar matters. A further recommendation was adopted by the conference urging the respective governments to enact legislation giving the widest possible protection to the sellers of goods.


You. are all lard Hat* with the agreements

for the arbitration of business disputes made be

tween the United States Chamber of Commerce and

the Chamber of Commerce of Buenos Aires* We may

expect that other countries will follow in the

very near future, and the creation of these agree

ments will be an important factor in obviating

the annoyance and delay of protracted litigation

in foreign countries and in providing for both

sides a safe and satisfactory basis for commerce

and trade»

It would lead too far to enumerate all

the topics discussed by the conference. I should

not omit, however, to mention that a resolution

was passed recommending that all the republics

of North,Central;and South America adopt a uni

form standard of money of account on the basis

of a gold coin 9/l0 fine and weighing 0*33^37

gramme. Thi3 unit, which might be called the


Pan American Franc, though nearly the value of

the European franc, is not iid &xa&4 equal, Tout

is precisely one-fifth of the United States gold

dollar. Delegates to the conference had suggest

ed making the gold dollar of the United States

the unit for all American countries, but against

this it was pointed out that the dollar would

be too large a denomination for many of the

Southern republics, where small coins circulate

and vhere, it was feared, the larger unit of

money of-account would bring about an increased

cost of living. Moreover, the United States

gold dollar could not be divided into subsidiary

coins small enough to comply with the known de

mands of many of these countries. It was

thought, therefore, that a unit of the approx

imate size of the franc would be better adapted

to the needs of these countries, but, by adopt

ing as the standard unit the exact one-fifth of


\2HP,

the United States dollar,, the foundation will

have been laid for a Pan American union of

coins which, sooner or later, may become of

great importance- If this plan should be car

ried into actual effect, the Pan American 20

Franc piece could ultimately circulate with us

as a $4 gold piece and our $5 gold piece could

circulate as a 25 Franc piece in South or Cen

tral American countries. A unity of standards

of this kind will, of course, have great advan

tages in facilitating trade between nations.

Amongst republics having actually introduced a

gold currency on this basis it might ultimately

lead to an ■understanding for the establishment

of international gold trust or clearing funds,

having for their object the elimination of the

costs and risks caused by our present wasteful

method of shipping and remelting gold coins. A

plan on these broad lines, submitted by the

1


Americen delegates, was recommended by the con

ference for closer study to all governments con

cerned.

The immediate practical importance of this

step may not be great. As indicative of the

trend of future relations between North and South

American republics, however, it can not be over

estimated. It shows, as one of the effects of

the war and of our financial emancipation, that

the North and South have recognized their common

economic and political interests; that they have

begun to consider this large hemisphere as one

economic unit, and that they are now looking to

each other for mutual help and cooperation in

the future development of their respective prob

lems. A Pan American monetary union, therefore,

now appears a more natural basis for the future

monetary systems of American republics than a


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Latin union based upon an agreement with France, Italy, Swtizerland and Belgium.

Our friends in South American consider the creation of our Federal. Reserve System as one of our greatest achievements, and their willingness to rely upon our ability to provide - to a certain extent at least - such financial aid as Europe gave them in the past is predicated upon the confidence that our new system inspires .Some of these republics are carefully studying . this system .with a view to establishing, at the proper. time a similar - banking machinery. In view of the fact that several of these countries are federations like the United States and cover tremendous areas of territory, it is evident that certain features of our system would be particularly well adapted to their needs.


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Tfthile observing financial and commercial

conditions in these countries, it was deeply im

pressed upon my mind how much the United States*

by legislative action, had in the past, handi

capped the development of .our business in foreign

lands. It would lead too far to mention to what

extent our own legislation in the past has driven

our merchant marine from the ocean and how far it

has handicapped our industries by not permitting

reasonable trade combinations enabling us to com

pete in foreign markets. But it is well within

the bounds of this address to mention that the

British, French and German banks for generations

have been entirely free to go into foreign coun

tries to open branches or acquire foreign banks

and to do everything and anything to further their

banking and trade. On the other hand, our na-


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tional banks, until the passage of the Federal

Reserve Act, were forbidden by lew to enter

these fields or to accept drafts for importations

or exportations or to exercise many other functions

necessary to develop foreign tanking and foreign

commerce. It is a relief to feel that at least

the time has come when a clear recognition of

our country's banking needs is asserting itself

and when most of these old shackles have been

removed. Whatever obstacle remains we may con

fidently hope to see gradually eliminated.

Some amendments along these lines are at

present under consideration by Congress, and have

already been favorably reported.

The Board has recommended that Congress

permit member banks to give their acceptances not

only for the financing of transactions involving

importations and exportations, but also,


to a limited, degree and under the supervision

of the Federal Reserve Board, for bankers’ clean

three months’ drafts, such as are required in

foreign countries for remittances abroad. As

most of you know, in South America, such remit

tances to foreign lands are generally not made

by checks but by three months’ drafts, and it is

necessary that national banks be permitted to

accept for this kind of foreign exchange trans

actions:, if the dollar bill is to be used as freely

in foreign lands as is the sterling, the franc,

and the mark exchange.

Turning to amendments touching domestic

operations, we have recommended that national

banks be permitted to accept drafts or bills

growing out of transactions involving the do

mestic shipment of goods, provided shipping doc

uments are attached at the time of acceptance,


■f! OfiQ

and drafts and bills 'which arc secured by ware

house or similar receipts covering readily mar

ketable staples,or by the pledge of goods actual

ly sold. We feel confident that, by enlarging

the powers of national banks to accept in this

manner we shall open for our member banks a new

and profitable field of operation, and incident

ally the free development of this kind of bank

ers’ domestic acceptance will be an important,

factor in equalizing interest rates in the var

ious parts of the country and will be of great

benefit in this respect alike to producer and

consumer.

We have also proposed an amendment

authorizing any national bank, located in a city

of more than 100,000 inhabitants and possessing

a capital and surplus of $1,000,000 or mere, to

establish branches within the corporate limits

of its city, and authorizing any national bank


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located in any other place, with the approval

of the Federal Reserve Board, to ectablish

branches within the limits of its county cr

within a radius of 25 miles of its hanking house,

irrespective of county lines. In recommending

the county line for branches, the Board was

moved by the thought that it might be found

convenient for several small hanks doing busi

ness in the same county to combine into one

larger hank, thereby reducing the overhead char

ges and making the deposits of one part of the

county available for the demands in another. It

is the hope of the Board that in some districts,

through such cooperation, it will he possible

to reduce the exorbitant interest rates which,

in some instances, have been charged by small

country banks. The Senate committee ha3 stipula- •

ted that, for the beginning at least, the num

ber of branches of a national bank shall be re-


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stricted to ten.

We have further recommended to Congress

that any national "bank, not situated in a central

reserve city, be permitted, within the same limits

now existing for loans on farm lands, to make

advances maturing in not ever one year on improved

real estate located anywhere within a radius of

one hundred miles of its place of business. Wnile

the Board doe:; not favor the idea of having na

tional banks make heavy investments in mortgages,

it was felt that they should not be precluded

from taking, within certain reasonable limits,

first mortgages as collateral security for their

loans.

These are the additional powers that

we have recommended to be given to national banks.

As to the Federal Reserve Banks, we have suggested

that Congress permit them to make advances to

their member banks on the latters1 own


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notes secured by eligible paper, such loans to

be for periods not exceeding fifteen days. This

has been done with a view to enabling Federal Re

serve Banks to accommodate members who, in the

check clearing or otherwise, might bo short in

their balances and wish to have short advances

at moderate rates. We.believe that this power,

if granted to Federal Reserve Banks, will greatly

increase their ability to take care, in a simple

and effective manner, of the requirements of

their members, and particularly of country banks.

Vie have further recommended that Congress

permit Federal Reserve Banks to issue Federal

Reserve notes, not only against commercial paper,

but also against the deposit of gold. This

amendment, if granted, -would greatly strengthen

the lending power and the note issuing power of

Federal Reserve Banks. It is the seme method


93

that has always been followed in Europe by the

Barque do France, the Reichsbank, the Bank of

the Netherlands, the Bank of Italy and many

other government banks. These institutions are

enabled, through their note issue, to assemble

a large part of the gold of the country in a

central reservoir. With us, up to the present

time, this accumulation of gold has taken place

to only a moderate extent and hao not benefit-

tea the Federal Reserve Banks to the fullest

possible degree. If the amendment were to be

passed, the gold, instead of being segregated

with the Federal Reserve Agent, would remain an

asset of the Federal Reserve Bank, and, on the

other hand, the notes issued against it, instead

of being, as at present, technically redeemed,

would remain the liability of the Federal Reserve

Bank.


In case the amendment should pass, it is

hoped that the Federal Reserve Banks may count upon

the cooperation of their members in order to facili

tate this substitution of Federal Reserve notes for

gold certificates at' v-h-cent carried in the pockets

of the people in the old-fashioned and uneconomic

manner. As in modern European count ries, the gold

should-accumulate in the FederaltReserve Banks and

the people should use instead the Federal Reserve

notes. The amendment would be an important step in

the ultimate simplification and consolidation of

our circulation.

These are the principal amendments recom

mended by the Board at this time. You will notice,

gentlemen, that they move in two directions. The

one is an increase of the Reserve Bank’s general

strength and lending power and an enlargement

of their scope of usefulness in dealing


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with their members; the other i3 the re'mov'p.i of limitations heretofore placed upon the operati cno of national hanks. The Board feels keenly that, as a matter of equity, national bank* should he placed on a parity with State hanks and trust companies, vdierev̂ r this can he done consistently with safety and conservative hanking principles. But I wish to make it clear that the Board has recommended, and will recommend, only -such measures as will eliminate old- fashioned or ur.wi3e restrictions such as should he removed under any circumstances, irrespective cf Aether or not the State banks exercise greater or lesser pc./ers. The Board would never recommend granting national hanks any powers .or privileges Tifcich are contrary to good hanking principles. It is to the interest of both State institutions and national hanks that hanking


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standards should he raised wherever practicable and not that they should he lowered. Between the national and State hanking systems, there must not he any competition to secure more members hy a lowering of banking standards. The vdiole country would suffer if this took place. It would he the height cf folly if States were to lower their requirements for no other reason than to underbid the requirements of national hanks. To a certain degree this has been done- where State goverments lowered the reserve requirements for their hanking institutions because the Federal Reserve Act lowered the reserve requirements for national hanks. The lowering of the reserve requirements for national hanks was prod- icat6d,however, upon their joining the Federal Reserve System subscribing to the stock and putting some part of their reserves into the joint


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insurance fund,and being bound ultimately to abandon the method of pyramiding reserves and ■ to keep them instead either entirely in metallic form or with the Federal Reserve Banks.The reserves of State institutions, on the other hand, were lowered without their being

t

required to join the system, make any such contribution, or discontinue pyramiding reserves. Moreover, lower reserve requirements are justified for member banks because they may have direct recourse to the rediscount facilities of the reserve system, but non-memb6r banks have no such direct access.

I wish* I could adequately impress upon the minds of all our bankers that there i3- no such thing as doing anything for the Federal Reserve System. Whatever the member banks do, and .whatever the State banks do> they do for themselves


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and for the country. The Federal Reserve System, a3 such, i3 nox a 3elf-seeking and profit-making organization. It "belongs to the entire country.It is there for the benefit of everybody for the greater security of the banks, and, through the banko, for the security of the'people. If you strengthen the Federal Reserve System, you strengthen yourselves. If you raise the sxancU- ard of banking, it is for your own benefit - not for xhs benefit of the Federal Reserve Banks, or least> of all, for that of the Federal Reserve Board.

These things appear trite,but still I cam not help expressing them because it i3 so absolutely essential that the thought be overcome that there can be such a thing a3 a conflict of interests between the Federal Reserve System and the banks.The Federal Reserve System and all it means is felt as an opposing factor where it


comes into conflict with had hanking practices.

It is true that the law has f or one of its ob

jects the removal of certain,habits which have

crept into the old hanking system, hut it is

equally true that, by removing them, financial

catastrophes such as used to befall our country

with uncanny regularity, are to be avoided in

the future.

Let us consider, as the strongest case

in point, the pyramiding of reserves. I wash it

had been possible to stamp out this e-avil within

a short time alter the opening of the Federal Re

serve System. Is it is, many of the smaller

banks are still in the condition of a patient

who knows that he must undergo an operation in

order to be fully cured, but whose mind every

now and then rebels at the thought, and who con

tinually relapses into arguing with himself that

after all, he might possibly prefer to continue


(!>

to live with his disease and take his chances

of the certain recurrence of acute convulsions

and intense suffering rather than to have the

operation performed. The country,, however, has

decided that the operation is necessary for our

future safety and growth, and the vast majority

of our hankers are in full accord that it is the

wisest thing to do. The pyramiding of reserves

will thus end on November 16, 1917. But, as I

said, I wish the operation had already been

performed.

At present our national banks apparently

have excess reserves approaching one billion dol

lars. Of these, a substantial proportion repre

sents items in transit between the depositing

and the depository banks; the balance, ex

cepting about $100,000,000 excess cash in vault

held by all national banks outside of New York,


is kept entirely in central reserve cities, the

hulk being in the City of New York* There it is

on deposit - drawing interest at the rate of 2$ -

and loaned out on stock exchange and other col

lateral, or invested in commercial paper, except

as to the required reserve of 18$ and the small

total excess reserve of about fifty million dol

lars. This is a reduction of excess cash re

serves in New York of over $100,000,000 since

January 22d.

If Farmer Jones deposits $1,003 in a bank

of Elk River, Minnesota, and this bank should in

turn deposit this amount in a bank at Minneapolis

and the Minneapolis bank in turn deposit it in New

York at 2$ interest, and New York invest this

money in a piece of commercial paper at 3$ in

terest, it is a .most extraordinary and unique

method to permit Elk River and Minneapolis to


I f

count these deposits as reserves, while if the

hank of Elk River had itself bought the piece of

p&#er it would havi carried it as a loan and all

the rest of the structure of reserve hank depos

its and reserves would have been wiped out*

In other words, in the final analysis, if

we consider the system as a unit, there is not

an excess reserve of one billion but only about in cash;

$150,000,000'./ the balance is invested to-day in

the "float", representing uncollected items in

transit, commercial paper, stock exchange loans

and securities. If we study the changes in the

condition of the New York Clearing House nation

al banks which have occurred between October Jlj

191̂ 4, and May 1, 1916, we find the following in

creases estimated at:


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*>JmO03

Oct. 31/14 May 11/16 . Collateral loans.... 5^7 mill- to 95^ - plus U07

Investments in se-curities.......... 10o 11 " 230 - . " I7 U

Unsecured loans which include commercial paper..... Uo6 11 n 667 - ,T 2 6 1

A total increase of ................ $8^2

During that period, deposits increasedfrom........... 1200 n « 2 1 0 0 - " 900

In addition, collateral loans and holdings

of securities of New York non-member trust com

panies increased by about half a billion since

the end of 1 9 1U.

These are phenomenal increases and we might

well ask ourselves whether or not we may take it

as a certainty that so extraordinary a growth

will prove to have come to stay or whether a

return of more nearly normal conditions will not

bring about a contraction. We should well con

sider this question, because'an increase of 90$


f > 04

in securities and collateral loans; - that is, an

increase of over $1,000,000,000 in New York City

Clearing House institutions - might well suggest

a policy of liquidation rather than one of fur

ther expansion. Our national tank cash reserves

in central reserve cities (including balances

with Federal Reserve Banks, figured at 100$)

were as of March 7, 22*83$; in reserve cities,

11.53$, 'and in country banks 9.80$ *. Notwith

standing that the aggregate cash held by all

national banks increased from May, 1915, to

March, 1916, by over $100,000,000; in central

reserve cities we are today materially below the

* If we figured these balances at 70$, being the present cash reserve condition, and the actual' metallic reserve, and added to cash in vault the metallic cover maintained against reserve agents’ balances, the present cash cover would show as follows: central reserve, 20.51$; reserve cities 13.66$ and country banks 11.83$.


old cash reserve requirements, and if a situa

tion like the present had existed during any

ante-Federal Reserve System period, we should

have considered it a cause for alarm. Thanks

to the creation of our new banking system, we

are now dealing with completely changed condi

tions, and the spectre of the end of the lend

ing power of the banks would not mean a panic as

in the past because of the reserve lending power

of the Federal Reserve Banks and the confidence

created by their existence. But, gentlemen,

that must not lead us into the illusion that

this billion of so-called excess reserves may

be considered as a basis for a loan expansion

of four billion dollars or more, as appears to

be the general belief. Theoretically there is

the foundation for so large an expansion as

long as we adhere to the old custom of counting


681.

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bank balances with reserve agdhts and uncollected

iteira in transit as reserve, yet, in the last

analysis, it is the metallic cover - not the re-

deposited and actually invested reserves - which

must be considered in dealing with this question

of expansion of loans. The excess of our metallic

reserve, plus the free gold of the Federal Reserve

banks, constitute the basis of the reserve lending

power of our country.

We are at present in a condition of extra

ordinary strength. We have bought back our own

securities and made foreign loans to an aggregate

amount far in excess of $2,000,000,'000. Our

financial position for the future has thus been

greatly fortified. But the process of absorption

of our securities returning from abroad should

be conducted on such basis and scope as to

turn the individual depositor into an invest-


681

or so as to free our gold reserves rather than

increase our loans on an enla,rged floating sup

ply of securities.

We must not forget for a moment that not

even the most experienced can foretell what de

mands may be made upon us in the future. At

the end of the war our opportunities will be

gigantic, but ultimately they will be limited

by the extent 'to which we are able to control

our gold. There cannot be an]/- doubt that the

demand for gold at that time will be very keen

and determined. Wise statesmanship, to my

mind, therefore, would indicate that every

thing should be done by the Federal Reserve

System and by ail the banks that are interest

ed in our strength to watch carefully further

expansion at this time and to accumulate the

floating gold supply in the hands of the Fed-

-38-


eral reserve banks so as to enable 'them* when

the time domes, if necessary, to spare large

amounts without thereby crippling their lending

power. We are in a period of wide-spread pros

perity at this time and it must be our serious

concern not to weaken its solid foundation* The

ease of this summer might well be used to

strengthen and prepare ourselves for the large

problems that may be in store for us.

It is impossible to try to prognosticate

with any degree of certainty what will t>e the

trend-of interest rates at the end of the war,

but assuming that interest rates for invest

ments in Europe will ebe high, and that the de

mand for gold on the part of Europe will be

keen, we would have to expect as a consequence

that eventually our rates will have to move up

so as to approach theirs mors closely, and be

fore we reach that point probably a substantial


amount of our gold will have to leave the country

and return to foreign lands. To preserve the

advantage of our strength and to maintain our

money rates on an independent basis of cur own -

in spite of the close inter— relation that must

exist between us and Europe - will be one of

our interesting but difficult tasks.

The establishment of the Federal Reserve

System has been a step of inestimable value in

the direction of efficient control of our country’s

gold holdings; and, if we do not disregard all

rules of business conservatism and prudence, it

will prove an efficient means of protection in

case of emergencies.

If we want more than a strong instru

ment of defense and protection, if we desire - as

we are entitled to - that the Federal Reserve

System be the foundation of a banking structure


581.

41 -

contributing its full share in rebuilding the

World and at the same tune assisting our own

country to meet all the new demands, -whether

domestic or foreign, that the future may make

upon it, then we must do all we can to preserve

its strength and to broaden its foundation by

further perfecting methods of systematically

accumulating and economically using our

vast treasure of gold* loo large a proj>6rtion

of this gold still remaihs wastefulljr fedaiteredl

and decentralized.

The gold stock of this country is es

timated at $2,320,00C,000. Of this amount, only

$335,000,000 is held in the vaults of the Federal

Reserve Banks and about $180,000,000 is in the

hands of the Federal Reserve Agents. The national

banks and State institutions hold about $800,-

000,000, and there is estimated to be in actual


681.

- .1+2 -

circulation about $870,000,000. If we abduct

from the $335,000,000 held by all federal Re

serve Banks a minimum reserve of only 40%,' that

would leave as their fi~ee gold about $200,000,-

000. This is an invaluable item of strength as

a basis for a note issue of $500,000,000 in

case additional currency should be demanded by

our people; and the Board, by permitting the

reduction of the 40% gold reserve, could, in

case of emergency, sanction the issue of even

larger amounts. When, however, it comes to ex

portations of gold you can readily see that the

$180,000,000 now accumulated with the Federal

Reserve Agents would serve as a very welcome

additional protection. For we have learned,

gentlemen, that this is a period of economic

history, ’where balances between nations are

not dealt with in millions, but in hundreds

of millions


1313

Think of the strength that our system

might possess if we carried into effect the

policies pursued by the Banque de France., the

Reichsbank or other powerful central banks, and if,

for a substantial part of the $870,000,000 of

actual gold circulation, there were substituted our

Federal Reserve notes, and if national and State

banks kept in their vaults only what they needed

for till money and deposited with the Federal

Reserve Banks the rest of their idle gold.

We talk of preparedness as the need of the

hour. If we contemplate what European nationa

have done, before and during the war, to streng

then their grip on their gol^ and compare it

with our own efforts, ws find that our financial

preparedness is just in its first stages. The

amendment recommended by the Board should prove

an important step in advance in this direction

681.

- 43 -


1313

681a

- 43-x -

In view of the statement made by some, of

Our critics that this substitution of Federal Re

serve notes for gold certificates means inflation,

it might be timely to point out that, by a simple

substitution of one note for the other, there is,

of course, no increase in the volume of circula

tion whatsoever. It is merely a change in the

form of circulation. As a matter of fact, we

find that the operation of all Federal Reserve

Banks for a period of one and a half years has

caused a net increase in the circulating medium

of the country, by the issue of Federal Re

serve notes and Federal Reserve Bank notes,

of less than $10,000,000* On the other hand,

the national bank circulation has decreased

during the period Hovember 2, 1914, to June 1,

1916, by $53,000,000, exclusive of the redemp

tion of the approximately $385,000,000 of

emergency currency issued under the so-called


1314

Aldrich-Vreeland Act, While it is evident.,

therefore, tha/t the Federal Reserve System

has not increased the volume of circulation,

the process of substituting, as a moans of

circulation, the Federal Reserve note for the

gold certificate has the most important effect

of strengthening the potential lending and note

issuing power of Federal Reserve Banks in case

of need. To refuse this larger power of pro

tection for fear that it might be misused

would be rantamoum to refusing to give a modern

revolver to a policeman for fear that he might

shoot at the wrong man and at the wrong time.


1315

681 <

- 44 -

But, let me ask you, gentlemen, is this

the proper time for country bankers to urge us to

recommend to Congress the further reduction of

their reserve requirements or to recommend that

they be granted permission to continue to hold

a certain percentage of their reserves with

their central or reserve city correspondents'?

Some day, no doubt, it will be proper to

reduce reserve requirements, but that can only

be brought about by a systematic strengthening

of the central reservoirs. The stronger the

Federal Reserve. Banks, the easier the access

to their resoui'ces by sale of liquid paper,

the less will become the necessity fcr member

banks to maintain in their own vaults, as a

legal requirement, large segregated gold hold

ings .


1316

681.

- 45 -

Steps in this direction are: first,'the

substitution of Federal Reserve notes for the

gold circulation in the pockets of the people;

second, the maintenance with Federal Reserve

Banks of larger member banks? balances, created

by depositing part of the “optional” now kept in

vault by member banks, and, finally, the increase

of the number of depositors to be secured

through the entrance of the State institutions

into our system.

I want to compliment our large member trust

companies and State banks upon the broad point of

view which guided them when entering the system;

but I might at the same time ask their powerful

sister institutions how, under present conditions,

they can justify themselves in staying out of the

system and in throwing the entire responsibility

and burden upon the shoulders of the national banks


1317

_ 46 -

and those few trust companies and State tanks that

have hecome members? They do not contribute their

fair share of gold to the general reserve fund of

the nation, nor do they provide their share of

the capital cf the Federal Reserve Banks. Indeed,

not only do they fail to contribute their share

of strength to the system, but unconsciously per

haps, they become forces that make for the direct

weakening of its strength and efficiency.

Do the large trust companies and State

banks claim that pyramiding of reserves is sound?

Would they prefer to see our ancient system per

petuated and the reforms contemplated by the Fed

eral Reserve Act abandoned so as to make room

again for the good old conditions of 1893 and 1907?

Unless they are willing to subscribe to that doc-

681.


1318

trine, how can these large hanking institutions,

some located in Central Reserve cities, justify

themselves in considering as reserve, after the

manner of the country banks, their interest bear

ing deposits with other banks?

If a call loan on the stock exchange-

made by a trust company is not a reserve but a loan,

is it sound banking to call a reserve deposit

made by a trust company in a national bank a re

serve, when 82$ of it is loan on call on the

stock exchange? Still, it is just through

these deposits that, in emergencies, the trust

companies will lean on the national banks and

the national banks, in turn, will fall back on

the Federal Reserve System* The net result is

that the trust companies, in building up their

business structure, must rely today on the

greater assurance provided by the Federal


±319

Reserve System, though permitting the member

banks to carry the entire burden of its support.

Our small country banks will have to stop pyr

amiding of reserves; do the large trust companies

and State banks plan to continue this practice?

What is it that powerful and prominent

institutions,(some of which, in their foreign

and acceptance business, derive the greatest pos

sible advantage from the discount market and the

general prestige of the Federal Reserve System,)

may say in justification of such an attitude?

At first they feared that, by entering

the system they might lose some of their present

powers and privileges. But the Board has made

regulations permitting them to continue to ex

ercise practically all legitimate banking func

tions enjoyed by them in the past.


681.,- 49 -

Some of the State institutions have raised

the point that, by joining the Federal Reserve

System, they would be called upon to make invest

ments in the stock of the Federal Reserve Banks

upon which, in the case of most of the Federal

Reserve Banks, no return has as yet been paid.

But, gentlemen, while for many reasons

some of us would favor an amendment permitting a

Federal Reserve Bank to pay back a portion of

the capital paid in (leaving the liability upon

the subscribed but unpaid capital otherwise un

changed) provided the member would in turn agree to

increase its required reserve balance by a certain

proportion of its optional balance, this question

in itself can not possibly be of sufficient im

portance to keep any strong State institution

out of the system. These dividends are


1321

- 50 -

cumulative, and anybody having a moderate de

gree of foresight can readily approciate that,

sooner or later, the back dividends will all be

paid. Even at the present low rate of return

of 2 .4/3, secured by Federal Reserve Banks from

their investments, they would have to employ

only an additional sum of less than $50,000,000

for the entire system to earn the full six per

cent on the stock at present paid in. When

the final instalment of reserves has been trans

ferred and with the return of more nearly .

normal rates of interest, there will not be the

least difficulty for these banks to earn their

dividends without investing a larger proportion

of their resources than would be consistent with

safety ana conservatism.

State banks and trust companies furthermore

681.


681.

claimed that if they entered they could not

withdraw. But the Board in the exercise of

its power to prescribe regulations as a con

dition of membership,, has provided that they

may withdraw under conditions previously made

known,and the subscription to the stock of a

Federal Reserve Bank made by a State institu

tion is conditioned upon this express agree

ment .

They have objected to being examined

both by their own banking department and by

the examiner of the Comptroller of the Currency.

The Board, in accordance with the provisions

of the Federal Reserve Act, has provided, how

ever, that, wherever there is an efficient

State examination, as in New York, it shall

be accepted in place of examination by the

- 51 -


6 8 1

Comptroller and, only failing that,, an examihation

shall he made by examiners under the supervision of

the Federal Reserve Board#

Furthermore., in a circular letter sent

to all State member banks in May of this ye£th, the

Board and the Comptroller of the Currency announced

that State member banks in making their stated re

ports to the Comptroller of the Currency, might use

the form of statement prescribed by their respective

State banking departments, provided they are rend

ered as of the same date as required by the Comp

troller of the Currency for national banks* If

reports are not rendered on those dates, State mem

ber banks are required to use the same forms as na

tional banks, but they may omit from their reports

to the Comptroller all schedules except that relat

ing to coin or coin certificates.

- 52 -


They have feared that the Clayton Act

would deprive them of valuable directors* But

Congress has amended that Act so as to permit

a director of a member bank to be* at the same a '

time,/.director of two other banks or trust com

panies, provided they are not insubstantial

competition “with the member bank.

I know the arguments tha~ are being

advanced that the rulings cl the Board may be

changed and that, therefore, it may be possible,

under a different personnel of the Board,to re

verse the present arrangement and subject tho

State banks tc the examinations.* reports, and

rulings of the Comptroller of the Currency* But

that is not likely to happen, and if it did, the

State bank or trust company could exercise its

privilege to withdraw from membership' in the

system.

Let us assume,however,that joining the


1325

581~2-A-

Federal Reserve System does involve certain

sacrifices,, some of which are necessary-and

some of uhich may be thought unnecessary*. If

you throw into one side of the scales all thar

benefits accruing tc the bank3 and the nation

by the creation of the Federal Reserve System J

and into the other the sacrifices to be mads by

its members, there can not be any doubt what

soever that the advantages will outweigh the

disadvantages a thousandfold* The Federal Reserve

Act is one of the most constructive pieces of

legislation that ever was put upon our statute

books* Nobody could be foolish enough to expect

that a lav/ which is so complicated in its nature,

so far-reaching in its scope, and a ccmprimise in

so many details between opposing views, could be

absolutely perfect* It is a wonder that, frcm

the beginning, it has proved as workable as. it


1326

^■3-rA-

681

has*

Personally* I am on record as having ap

posed several of its features of detail* But,

when the President honored me "by inviting me to

become a member of the Boards I accepted be

cause I felt that the fundamental principles

were sound and that the Act, as it stood, would

redound to the greatest benefit of the country.

I felt confident that if after sincere and un

biased efforts in the operation pf the Reserve

banks, defects should develop that needed cor

rection, we could confidently count on a pa

tient and sympathetic hearing before Congress*

And let me remind you, gentlemen, that several

of my colleagues and the able men vho accepted

to serve at the head of your Federal Reserve

Bank .of JTew York, all ,j cined in the same spirit;

they did so for th6 purpose of serving their


1327

681.

- 4-A -

country oven though, they had to make material

sacrifices in doing so.

In one of his admirable speeches., entitled

"Ideals and Doubts", Oliver Wendell Holmes, As

sociate Justice of the Supreme Court of the United

States, makes the following statement concerning

the. topic of legal reform;

"To know what you want and why you think that such a measure will help it is the first but by no means the last step towards intelligent legal reform. The other and more difficult one is to realise what you must give up to get it, and to consider whether you are ready to pay the price."

These £,re golden words of wisdom which, at

the present juncture of our economic history, every

bank president in the United States ought to have

constantly before his eyes.

For generations we have lived shackled

and constantly menaced by a defective and old-

fashioned banking system; for years we have


toiled to secure reform. We have at last brought

it about and, whether or not it pleases everybody

in every detail, it behooves us all to do our

share in making it a success for the greatest pos

sible benefit of our country, no matter whether

it involves some small or even a heavy sacrifice.

That is the principle which members of the Board

have laid down for themselves, and if they are to

be faithful to their trust and successful in

their task, there is no other principle upon

which they can deal with the banks of the country.

That is why, though sincerely appreciating the

hardship it entails for the country banker, and

fully sympathizing with the difficulties of his

position, we must say to him: "Forget these ex

change charges. We think our new clearing plan

is fair and equitable, free from unsound principles ■

and bound to become a very effective instrument for

the general good. It offers to take from you at par

all your checks on any member bank of the entire United


681

- 6-A -

States, and certain State banks in addition,

and will refund you any actual expense that you

may incur in case you have to remit currency.

All it asks of you in return is that you remit

without 'charge to your Federal Reserve Bank in

payment of checks drawn on yourself* But even

if we did not believe that, by the service we

render and by relieving you of the necessity

of maintaining bank balances all over the

country, we shall compensate you for what you

think will be your loss, we have to hold to the

view that you must pay the price - whatever

your little share may be - for the larger bene

fit of all."

The new system brings new opportunities,

as an illustration, let me remind the country

banker that his exchange lose will appear to

him very unimportant if he will adopt, the habit


1330

6SI.- 7-A -

of paying for his deposits a fluctuating rate

of interest, which should always remain a cer

tain percentage heiow the ninety day discount

rate of his Federal Reserve Bank- The unrea

sonable rates paid for deposit money are a seri

ous menace to the safety of our banking system

and the economic development of our country.

And, with this seme spirit, and even

with greater emphasis, we must say to the State

banks and trust companies:

At this momentous period of its financial

history, the country is entitled to have its

banking system attain its maximum strength. Ir

respective of burdens involved - imaginary or

real - it is the duty especially of these large

State institutions to come in promptly and con

tribute their share, making whatever suggestions

they think helpful as friends and members rather


than as critics from the outside. I am glad

to state that one of our largest trust companies

expressed precisely this broad point of view

when applying for membership.

The Federal Reserve System will grow

stronger with every coning day, and the stronger

it grows and the more it perfects its organiza

tion, the more apparent will its benefits become

for all its members,

A great deal of pressure has been brough

to b®ar upon the Federal Reserve Board, particu

larly during the early stages of the development

of American bankers1 acceptances, to cause dis

crimination against the acceptances of non

member banks. So far the Board has been dis

inclined to favor such a policy as it was thought

to be in the general interest of the country to

give encouragement to the freest and fullest


development of this acceptance business, which

is of the greatest benefit to the trade of our

country. The Board thought further that time

should be given to the State banks and trust

companies to acquaint themselves fully with the

policies tc- be pursued both in dealing with

State institutions in general and the accept

ance business in particular. Nor does the

collection plan just approved by the Federal

Reserve Board contain any element of discrimi

nation against non-member State banks collect

ing, at par //.ithout cost, their out of town

checks through member banks of the system.

The Board believes, however, that the time has

now come for these large institutions to recog

nize their duty to join the system. It will

not be long before the banks that stay out of

the system will become conscious of the fact

that member banks will command the greater


1333

681.10-4 -

confidence, and there is nc doubt that the pub

lic will begin to resent having its interests

sacrificed for the benefit of institutions un

willing to join the general protective system,

and that before long their resentment will have

to be heeded.

Before ©losing, I should like to make it

clear that, though speaking to the New York State

Bankers* Association, whatever I have said is

meant to apply to the State institutions of the

entire country. I should not wish to give the

impression that I am particularly critical of

the New York institutions. Quite the contrary,

I am very glad to have this opportunity of tes

tifying publicly to the spirit of good citizenship

that you have manifested in every phase of the

development of the system from the very first


1334

v

beginnings - when we were dealing with the gold and

cotton funds in the fall of 1914,, In the negotiations,

resulting in the creation of these two funds, there

assorted itself for the first tin® in our financial

history a bread national spirit uniting in a work

of patriotic cooperation national banks, State banks

and trust companies of every section of the country.

That was the first effect of the coming of the Fed

eral Reserve System, . the physical organization of

which at that time had not even been completed. Ib

is this same spirit, this larger conception of

banking functions and ideals, that will ultimately

lead into the Federal Reserve System all elements

worth hewing - that is, all elements of financial

and moral strength.

I trust that my frankness will not be

misunderstood by you. There is an old adage

that "imitation is the sincerest form of flattery."


1335

I venture to paraphase this saying iniot

"frankness is the sincerest form of flattery,

■because it shows that you respect the intelli

gence and moral fibre of your audience.

I believe that our future looms large

beyond measure;

I believe it our duty to be financially

prepared on the broadest possible scale;

I believe that we should use the months

ahead of us; not to expand any further, but

rather to consolidate our strength;

I believe that, through the Federal Re

serve Banks, we should strengthen our hold on

the gold in circulation ana that the stronger

the geld holdings of these banks, the better

shall we be equipped to cope with the problems

ahead of us, of helping ourselves and of help

ing the world;


1336

681.

- 13-A -

I "believe it to be the duty of every bank

in thd country to contribute its share in equipping

cur rlktion for this task;

I believe that State institutions which

are strong enough should cone in now and do their

share, no matter whether or not they are in full

accord with every detail of the Federal Reserve

machinery;

I believe that, as we proceed and gain

in experience, whatever may prove harmful will

be remedied. The tendency of the country is for

a fair deal for fair people;

While I believe that the country expects

that strong State institutions should do their

duty and join, we are neither begging nor club

bing anybody to come in or to stay in;

But I firmly believe that the future will


1337

- I4-A

681.

belhng to those hanks - national or State -

that are members of the Federal Resente

System.

Fini3


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